DAILY ENERGY COMPLEX COMMENTARY 12/21/17

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1 Thursday December 21, S. Wacker Dr., Suite 2350 Chicago, IL or DAILY ENERGY COMPLEX COMMENTARY The bulls control despite a series of bearish developments OVERNIGHT CHANGES THROUGH 6:05 AM (CT): CRUDE -12, HEATING OIL -2, UNLEADED GAS -5 CRUDE OIL MARKET FUNDAMENTALS: Like a number of other industrial commodities, crude oil managed an upside breakout yesterday but the market has also extended that action early today with the highest trade in seven sessions. The market was lifted by a headline decline in US weekly crude oil stocks yesterday and perhaps because of news that US weekly crude oil imports declined. The market is forging gains this morning despite the increased prospect of US Arctic drilling and the news of a return of activity in the Forties Pipeline system. The markets have also discounted reports of the prospect for increased drilling in the lower 48 states and prices have also ignored reports of a Russian/BP Arctic exploration joint venture! EIA crude stocks fell million barrels and are million barrels below year ago levels. Also, crude stocks stand million barrels above the five year average. While the shortfall in US crude oil stocks has led to a significant shortfall that deficit might be the result of the slow recovery in the US refinery rate from the tropical storms. However that deficit is real and it adds to the generally bullish supply-side of the equation. Crude oil imports for the week stood at million barrels per day compared to million barrels the previous week. Another supportive development came from declining Russian Baltic cargo loadings for the first half of January which suggests that over supply news this week has come down on the bullish side of the equation. Even the demand side of the equation has seen headline support this week as talk of a significant ship backup off the coasts of Australia and Singapore is supposedly the result of increased commodity demand into China. In other words higher commodity demand from China probably equates to higher Chinese energy demand ahead. PRODUCT MARKET FUNDAMENTALS: Even the gasoline market ranged higher yesterday in response to the breakout up in crude oil pricing and it has extended that push this morning in a fashion that suggests the bulls have maintained control. Surprisingly, the heating oil market lagged behind the rest of the energy complex yesterday perhaps because above normal temperatures continue to hang over the heating oil market. While the heating oil market gains yesterday were less significant than gasoline or crude oil the market might have a stronger bullish fundamental condition than the rest of the complex with distillate stocks maintaining a 24.6 million barrel annual deficit and low sulfur diesel stocks maintaining an annual stocks deficit of 20 million barrels. Even more surprising is the fact that the gasoline market was so strong despite a build in weekly stocks from the EIA and a narrowing of the gasoline stock's annual deficit. The refinery operating rate was 94.10% up, 0.70% from last week compared to 91.50% last year and the five year average of 91.86%. EIA gasoline stocks rose million barrels and are 953,000 barrels below last year and million above the five year average. Average total gasoline demand for the past four weeks was up 0.43% compared to last year. Gasoline imports came in at 487,000 barrels per day compared to 483,000 barrels the previous week. EIA distillate stocks rose 769,000 barrels and stand at million barrels below last year and million below the five year average. Distillate imports came in at 380,000 barrels per day compared to 149,000 barrels the previous week. Average total distillate demand for the past four weeks was down 1.24% compared to last year. Weekly EIA Petroleum Report In Million Barrels

2 CRUDE OIL Stocks Imports Refinery Capacity(%) Week Of Current Weekly Change Yearly Change 5 Year Average Current Current Year Ago 12/15/ DISTILLATES Stocks Imports Demand Week Of Current Weekly Change Yearly Change 5 Year Average Current Current Year Ago 12/15/ GASOLINE Stocks Imports Demand Week Of Current Weekly Change Yearly Change 5 Year Average Current Current Year Ago 12/15/ NATURAL GAS: While we suspect a noted escalation in the net spec short has taken place, the technicals are not severely sold-out yet but they are getting closer. Furthermore, without much colder than "normal" temperatures chained onto the near term cold, the risk to bottom pickers looks relatively high. Despite the forecast for a very cold start to 2018 in the coming two weeks, the natural gas charts continue to look very bearish and we fear a bearish storage reading later this morning. In the end a brief period of much colder than normal temperatures on the tail end of a much warmer than normal 25 days in early December simply equates to average/poor demand. Therefore, it is very surprising to us that a survey this week predicted the inventory report today to result in somewhat large draw in stocks! In fact the 5 year average change for this week is a draw of 125 bcf. While one might expect to see a slight tightening of conditions as we enter the actual winter period, to forge a definitive bottom, a recovery bounce will clearly require an extension of the cold beyond the first week of January. At least in the near term, we can't argue against a return to the mid-december highs in February crude oil up at $58.60 even though the market is probably moving toward a fresh record spec and fund long positioning. Fortunately for the bull camp, this Friday's COT spec positioning in crude oil will not include the action beyond Tuesday. Uptrend channel support in February crude oil today comes in at $ In the heating oil market, we see its uptrend less aggressive but perhaps more uniform and less volatile than the gasoline and crude oil rallies. OTHER ENERGY CHARTS: ENERGY COMPLEX TECHNICAL OUTLOOK: CRUDE OIL (FEB) 12/21/2017: Stochastics are at mid-range but trending higher, which should reinforce a move higher if resistance levels are taken out. The close above the 9-day moving average is a positive short-term indicator for trend. With the close over the 1st swing resistance number, the market is in a moderately positive position. The next upside target is The next area of resistance is around and 58.60, while 1st support hits today at and below there at

3 HEATING OIL (FEB) 12/21/2017: Momentum studies are rising from mid-range, which could accelerate a move higher if resistance levels are penetrated. A positive signal for trend short-term was given on a close over the 9- bar moving average. It is a mildly bullish indicator that the market closed over the pivot swing number. The nearterm upside target is at The next area of resistance is around and , while 1st support hits today at and below there at RBOB GAS (FEB) 12/21/2017: The major trend could be turning up with the close back above the 40-day moving average. Stochastics are at mid-range but trending higher, which should reinforce a move higher if resistance levels are taken out. The market now above the 18-day moving average suggests the intermediate-term trend has turned up. There could be more upside follow through since the market closed above the 2nd swing resistance. The near-term upside objective is at The next area of resistance is around and , while 1st support hits today at and below there at NATURAL GAS (FEB) 12/21/2017: Daily stochastics are showing positive momentum from oversold levels, which should reinforce a move higher if near term resistance is taken out. The market's close below the 9-day moving average is an indication the short-term trend remains negative. The market's close below the 1st swing support number suggests a moderately negative setup for today. The near-term upside target is at The next area of resistance is around and 2.811, while 1st support hits today at and below there at DAILY TECHNICAL STATISTICS 9 DAY RSI 14 DAY RSI 14 DAY SLOW STOCH D 14 DAY SLOW STOCH K 4 DAY 9 DAY 18 DAY 45 DAY 60 DAY CLOSE ENERGY COMPLEX CLAG CLAH HOAG HOAH RBAG RBAH NGAG NGAH Calculations based on previous session. Data collected 12/20/2017 Data sources can & do produce bad ticks. Verify before use. DAILY SWING STATISTICS Contract Support 2 Support 1 Pivot Resist 1 Resist 2 ENERGY COMPLEX CLAG8 Crude Oil CLAH8 Crude Oil HOAG8 Heating Oil HOAH8 Heating Oil RBAG8 RBOB Gas RBAH8 RBOB Gas NGAG8 Natural Gas NGAH8 Natural Gas Calculations based on previous session. Data collected 12/20/2017 Data sources can & do produce bad ticks. Verify before use. DAILY COCOA COMMENTARY Long term bullish on stronger demand, lower West African output expected in coming year.

4 Cocoa remains in its recent consolidation zone, and this could give the bulls some second thoughts about holding long positions into the holiday weekend. The market has seen some positive developments from the supply and demand sides of the market over the past week, and this has helped to lift prices clear of their recent lows. A major international trading firm has projected cocoa prices to finish 2018 near $2300, well above current price levels, citing among other factors the advanced age of many cocoa trees that is causing them to bear less fruit. One cautionary note has come from updated forecasts for La Nina, calling for it to last through the first quarter of This could blunt the negative impact of West Africa's dry season on growing areas. March cocoa finished yesterday moderately higher but then settled back overnight as it continued to consolidate Monday's gains of off the apparent settlement of the exporter default issue in Ivory Coast. Cocoa has found support from recent strength in the euro and the British pound, which has helped improve the European demand outlook. Port arrivals in Ivory Coast are running behind last year's pace, due in part to flooding and terminal booking problems. La Nina may diminish the Harmattan winds and reduce the effect on the dry season on West African production, but Ivory Coast and Ghana are still likely to see a 10% decline this season at the same time that global demand is expected to see a 3% to 5% increase. March cocoa should find near-term support at 1892 with resistance at A move through resistance would project to COCOA TECHNICAL OUTLOOK: COCOA (MAR) 12/21/2017: The stochastics indicators are rising from oversold levels, which is bullish and should support higher prices. The market's short-term trend is positive on the close above the 9-day moving average. A positive setup occurred with the close over the 1st swing resistance. The next upside objective is Shortterm indicators suggest buying dips today. The next area of resistance is around 1950 and 1960, while 1st support hits today at 1912 and below there at DAILY COFFEE COMMENTARY Lower Colombian production could tighten N Am. supplies. Bullish near-term supply developments are helping coffee extend its recovery move. A trade group in Colombia forecast that first-half 2018 Colombian coffee production may be down as much as 20% from last year due to heavy rainfall. This would follow a poor fourth quarter that could put pull the total this year below 14 million bags. Honduras' exports have been delayed by protests. It is still early in the harvest season, so the impact so far has probably been small, but if the situation worsens, it could tighten availability. Honduras is the thirdlargest producer of Arabica coffee. Coffee continues to face headwinds from the expectation that Vietnam's current crop and Brazil's upcoming crop will see significant increases. March coffee traded to a 1-1/2 week high yesterday before finishing with a moderate gain and the fifth positive day in the past six sessions. ICE exchange coffee stocks rose by 3,070 bags on Wednesday to reach their highest level since October Nine months of sharply lower Colombian output would have a significant impact on North American near-term supply and could bring the build streak in ICE exchange stocks to a halt. The market is also approaching a potential bull/bear line at , and a move above that level could fuel additional short-covering. Near-term support for March coffee is at , with close-in resistance at

5 COFFEE TECHNICAL OUTLOOK: COFFEE (MAR) 12/21/2017: Rising from oversold levels, daily momentum studies would support higher prices, especially on a close above resistance. The close above the 9-day moving average is a positive short-term indicator for trend. The market setup is supportive for early gains with the close over the 1st swing resistance. The next upside target is Daily studies suggest buying dips today. The next area of resistance is around and , while 1st support hits today at and below there at DAILY COTTON COMMENTARY Export pace in US and Brazil running strong. Indian production is still in question due to pink bollworm, and that along with strong US exports have been key factors lifting the cotton market in recent weeks. The next look at US exports will come with the weekly sales report this morning, and a strong number could send the market to new contract highs. Last week's report confirmed a strong sales pace, with cumulative sales running at 73.5% of the USDA's forecast for the entire marketing year versus a 5-year average of 68.8% for this time of year. Total sales have been 236,000 bales or higher in each of the last nine weeks, and another strong reading this week could spark some renewed buying. A Brazilian farmer group is estimating that his nation's cotton sales will reach 58% of annual production through mid-december, up from 50% a year ago. The most recent USDA report put Brazil's exports for the entire year at 51% of their annual production. If these farmer group's estimates are correct, it could mean that global supply is tighter and/or global demand stronger than previously estimated. The textiles ministry in India is estimating that in the average cotton yield will decline 13% in Maharashtra, a key cotton producing state. The Times of India reports that cotton growers are tending to go through only 2-3 rounds of pickings due to the pink bollworm attack versus a typical amount of 4-5 rounds. Other sources have reported drops in yield ranging from 17% to 38%, and an estimated 60% of farmers have been affected. It may be another two weeks before official numbers are released. If the US export sales report is strong, it could drive the market to new highs. Look for support in March cotton at and then A move above there would leave as the next upside objective. COTTON TECHNICAL OUTLOOK: COTTON (MAR) 12/21/2017: Daily stochastics turning lower from overbought levels is bearish and will tend to reinforce a downside break especially if near term support is penetrated. A positive signal for trend short-term was given on a close over the 9-bar moving average. A positive setup occurred with the close over the 1st swing

6 resistance. The next downside objective is now at The next area of resistance is around and 76.58, while 1st support hits today at and below there at COTTON (MAY) 12/21/2017: Momentum studies trending lower from overbought levels is a bearish indicator and would tend to reinforce lower price action. A positive signal for trend short-term was given on a close over the 9- bar moving average. The market setup is supportive for early gains with the close over the 1st swing resistance. The next downside target is now at The next area of resistance is around and 76.94, while 1st support hits today at and below there at DAILY SUGAR COMMENTARY India and Brazil shift to ethanol supports sugar. Fresh bullish supply developments are helping sugar prices extend this week's rally. The Indian government announced that they are lifting stock limits for their nation's sugar mills, due in part to the current harvest running 30% ahead of last season's pace. This could lead to as much as 1.5 million tonnes of fresh purchases. Indian sugar mills are expected to produce 1.4 billion liters of ethanol during their 2017/18 season, more than double last season's total of 665 million. Their government has targeted 10% ethanol blending in domestic gasoline. Energy prices came through the US weekly stocks window on Wednesday with a positive tone that helped to boost sugar prices as well. March sugar traded to a new 2-week high of yesterday before finishing the session with a moderate gain. This was the first time March sugar closed above the 50-day moving average since December 5th. Expectations for heavy output from India (28 million tonnes), Thailand (12 million tonnes) and Europe suggest a bearish global supply outlook. But if energy markets and the Brazilian currency continue to find strength at the same time that the world's top 2 producers (Brazil and India) are boosting ethanol production, sugar may have the capacity to continue its recovery into the holiday weekend. Near-term support for March sugar is at and 14.35, with an upside target of SUGAR TECHNICAL OUTLOOK: SUGAR (MAR) 12/21/2017: The cross over and close above the 60-day moving average indicates the longerterm trend has turned up. Momentum studies are trending higher from mid-range, which should support a move higher if resistance levels are penetrated. The cross over and close above the 18-day moving average indicates the intermediate-term trend has turned up. The market has a slightly positive tilt with the close over the swing pivot. The next upside objective is The next area of resistance is around and 14.78, while 1st support hits today at and below there at ***This report includes information from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. Any information or recommendation contained herein: (i) is not based on, or tailored to, the commodity interest or cash market positions or other circumstances or characterizations of particular investors or traders; (ii) is not customized or personalized for any such investor or trader; and (iii) does not take into consideration, among other things, risk tolerance, net worth, or available risk capital. Any use or reliance upon the

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